Due to the pronounced decline of the Kenyan shilling against the U.S. dollar, the Central Bank of Kenya (CBK) saw its unrealized foreign exchange gains on dollar reserves soar to Sh131.5 billion in the year ending June 2023, up from Sh68.6 billion the previous year. 

The CBK’s annual report highlights that this significant rise in forex gains contributed to an increase in its annual net surplus, reaching Sh150.5 billion, up from Sh76.9 billion in June 2022. 

Serving as the guardian of Kenya’s official foreign reserves, the CBK reported that by June, these reserves were valued at $7.48 billion, which translates to Sh1.115 trillion with current exchange rates. Such reserves are crucial for the nation, functioning as a protective measure to ensure foreign exchange is accessible for the country’s external financial commitments, encompassing import payments and external debt servicing. 

A noteworthy 19% decline of the shilling against the dollar over the 12 months to June, resulting in an exchange rate of 140.52 units, further illustrates the benefit of holding dollars during this period. Conversely, those spending in foreign currency, like importers, faced challenges due to elevated foreign exchange acquisition costs. 

Thanks to higher returns from securities and deposits, the CBK’s actual earnings for the year jumped to Sh19 billion, up from Sh8.33 billion in 2022. As noted in the annual report, “The Bank reported an unrealised forex gain of Sh131.49 billion this year, due to the U.S. dollar’s robust performance against the shilling, compared to Sh68.56 billion in 2022.” The report also mentioned a decrease in market prices leading to a Sh4.69 billion loss on fixed income securities. 

Due to the escalation in realized gains to Sh19 billion, the CBK elevated its dividend to the Consolidated Fund by Sh1 billion, reaching Sh5 billion for the year. The combination of both realized and unrealized gains bolstered the CBK’s general reserve fund, with an accumulated realized surplus of Sh65.5 billion, up from Sh54.47 billion in 2022, and unrealized gains reaching Sh301.24 billion, up from Sh172.5 billion. 

In June 2022, CBK utilized a portion of these gains, lifting its paid-up capital from Sh35 billion in 2021 to Sh38 billion. 

Similarly, the private sector has recognized the potential gains from retaining dollars. By the end of July, records show local bank accounts holding a massive Sh1.25 trillion in U.S. dollar equivalent, a rise from Sh904.2 billion from the previous year. This surge not only mirrors the exchange gains on these holdings but also signifies a continuous accumulation of dollars in tandem with the expanding economy. 

The inclination to hold onto dollars more tenaciously has grown, primarily due to uncertainties regarding forex accessibility, even though conditions have shown improvement since the start of the year. 

Around 70% of Kenya’s dollar deposits come from corporates, with households holding the remainder, suggesting that a large portion isn’t retained for speculative reasons. However, for commercial banks, the rapid increase in the value of these dollar deposits, considered a liability, is a growing concern. This situation could strain their capital defenses since their forex liabilities outnumber their forex assets. 

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